Leasing a car and traditional auto financing might live in the same category in your mind, but they're two completely different processes. One thing both have in common is that they can be more difficult to accomplish when you have bad credit.
Differences Between Car Leasing and Auto Financing
The key differences between leasing and financing are in the areas of ownership, affordability, and warranty coverage:
- Ownership – At the end of your car lease, you have the option to purchase the vehicle, but there isn't any implied ownership in the process. At the end of your auto financing term, you become the owner of the vehicle.
- Affordability – With leasing, your monthly car payment is typically lower than it is with financing. The lease term is usually shorter than a typical financing term and you only pay for the portion of the vehicle used, which means a lease costs less in the short run. But remember, the extra time and money that goes into a loan results in car ownership at the end, as well as equity in the vehicle.
- Warranty Coverage – When it comes to being covered by a warranty, leasing is the process that benefits the most. During a lease term, the car is typically covered by a full warranty the entire time. This can be a big money saver when it comes to maintenance and repair. With auto financing, you only get a warranty if you buy a new vehicle, but these typically only last for three years. If you buy used, the only way to get warranty coverage is to pay for it.
Know Your Terminology
There are also subtle differences in the language of leasing and financing, and some similar parts of the process are called different names. Let's take a look at these differences:
Capitalized Cost vs. Purchase Price – Both of these refers to the negotiated price of the vehicle. The capitalized cost, or cap cost, in leasing is the negotiated selling price plus any additional fees. The purchase price, used in financing, is the negotiated selling price of the car plus taxes and fees.
Cap Cost Reduction vs. Down Payment – Both are payments made up front that reduce the overall amount of your monthly payment, but that's where the similarities end. In leasing, a cap cost reduction is simply a prepayment of your lease, which reduces the amount of your monthly payment but doesn't save you money overall. With a loan, a down payment reduces the amount financed, which not only lowers your monthly payment, but also saves you money in interest charges over the term of your loan.
Money Factor vs. Interest Rate – Both of these terms refer to the amount charged for financing. The money factor, used in leasing, is expressed as a very small decimal. The interest rate, used on loans, is expressed as a percentage. Both of these numbers can vary when you lease or finance, depending on a number of factors, including your credit.
Residual Value – This term is used in leasing and doesn't have an equivalent in financing. The residual value is the estimated value of the car at the end of your lease term. This amount is set by the leasing company and is what your vehicle can be purchased for once your lease is completed.
Which Option is Best, Car Leasing or Auto Financing?
The option that's best for you depends on your situation, but if that situation includes poor credit, you might be out of luck on a lease. Leasing is typically only available to people with good to excellent credit. On the other hand, you can often get auto financing even if your credit score is less than stellar – as long as you use the right type of lender.
Bad credit car loans are offered by subprime lenders. These lenders only work through special finance dealerships, so you can't sit down face to face with them. When you visit a special finance dealer, the lenders your application is sent to look beyond your credit to other factors such as your income, and employment and residence stability when qualifying you for a loan.
So, if you have bad credit and need a vehicle, special financing might be the option for you. If you're not sure where to start looking for one of these special finance dealerships, we want to help.
Finding the Right Dealer
Here at Auto Credit Express we work with a nationwide network of special finance dealers that have the lenders available to help people in many credit situations including bad credit, no credit, and even bankruptcy.
We can help you get an auto loan with a dealership in your area. All you have to do to start the process is complete our free and secure car loan request form, and we'll get to work matching you with a local dealer!